Economy Slips Again as Production Dips 0.1% in May

WASHINGTON — The U.S. economy, held back by a strong dollar that continues to depress agriculture and manufacturing, stumbled again in May as industrial production dropped for the second month in a row, the government reported Friday. And a second report showed that falling food prices limited the rise in producer prices to a modest 0.2% for the month.

Production by the nation's factories, mines and utilities slipped 0.1% last month, the Federal Reserve announced, and the Labor Department reported that inflation at the wholesale level remained in check, up only 1.1% over the last 12 months.

The latest evidence of continued weakness in important segments of the economy renewed speculation that the Fed will have to take further steps to revive growth by lowering interest rates.

But earlier reports Thursday that retail sales were stronger than expected over the last two months, along with a big increase in auto sales in early June, left many analysts puzzling over how the central bank should deal with a situation in which farms and factories continue to struggle but other sectors of the economy enjoy steady growth.

'State of Siege'

"We've got manufacturing and agriculture under a state of siege, but the biggest chunk of the economy is still healthy," said Allen Sinai, chief economist at Shearson Lehman Bros. in New York. "It creates a real dilemma for the Fed. Can they get interest rates down to a level where they revive manufacturing without creating a runaway boom in services and construction?"

The Fed's easier monetary policy already has encouraged short-term interest rates to fall, with rates on three-month Treasury bills trading Friday as low as 6.8%, compared to rates of 8.6% as recently as March. Last month, the Fed cut the interest rate it charges banks--the discount rate--to 7.5% from 8%, the level in effect since the beginning of the year.

Several analysts predicted that the Fed would initiate another cut in the discount rate soon, although there is little evidence that the economy is on the verge of a recession.

"We're not looking for any serious recession across the economy as a whole," said David Cross of Chase Econometrics, a forecasting firm based near Philadelphia. "But the possibility of several months of weak manufacturing activity is entirely likely."

David Ernst, a senior economist at Evans Economics, a Washington economic consulting firm, predicted that "we should see output begin to pick up in the months ahead. The flip side (of the twin economic reports) is that the strong dollar has been keeping inflation low."

Energy Prices Up Again

The May increase in the producer price index, which followed a 0.3% rise in April, was blamed almost entirely on the third straight month of sharply higher energy prices. But analysts said that the increase in gasoline and heating oil prices probably has run out of steam.

"There's no way energy prices are going to zoom this year," Ernst said. "If anything, I see gasoline and fuel oil prices weakening later this year."

In contrast to energy prices, the price of food at the wholesale level, which had fallen or held steady in eight of the previous 12 months, dropped an additional 1.1% in May. The biggest price declines occurred in fresh fruits and vegetables and beef and veal.

The 0.1% dip in industrial output, which followed a 0.2% decline in April, was led by another decline for business equipment, which has fallen for five straight months. The Fed cited continued weakness in commercial equipment, particularly for computers.

Computer Firms Cut Back

In just the last week, two major computer manufacturers announced cutbacks. IBM--by far the nation's largest computer maker--acknowledged that its earnings will be down for the first nine months of the year, and Apple Computer, a leader in the troubled personal computer market, disclosed that it would lay off 1,200 workers and said Friday that it expects to lose money in the current quarter.

Without strong 0.3% increases in defense manufacturing and construction supplies, the overall decrease in industrial production would have been considerably greater.

In a separate report Friday, the Commerce Department said that inventories of manufactured goods rose 0.4% in April after a 0.1% drop in March. The report noted that overall sales were up a strong 1.2% in April.